Is it always a good time to invest in stocks?

Since starting my career in the late 1980s, I have heard the continuing mantra from contemporaries in the insurance and financial sector, as well as many in the media, that, in general, it is always a great – or at least a good – time to invest in stocks.

Usually this premise is supported by some reference to the historical average returns of stocks and how they have outperformed nearly all other forms of investment over time.

However, after watching the markets bubble and burst several times in recent years, and thinking about the economic conditions into which tens of millions of Baby Boomers will soon be retiring, I have become more and more skeptical of such conventional wisdom.

So, is it really always a great or even a good time to invest in stocks?

It turns out, maybe not.

Yes, stocks have outperformed many other forms of investment over the long haul.

But therein lies the rub…the long haul.

In the 1900s, there were three major stock market bubbles: 1901, 1929, and 1966. What’s news to most people is that in each of these cases, the twenty years following those bubbles were effectively stock market depressions.

Here are the returns for the twenty years following each of the 20th century bubbles, including dividends and adjusted for inflation to provide “real” average rates of return,

  • Twenty years following the 1901 bubble, -0.2%.
  • Twenty years following the 1929 bubble, 0.4%.
  • Twenty years following the 1966 bubble, 1.9%
    (Source: The Great 401(k) Hoax, Wolman & Colamosca, pp. 20.)

Such rates of return would hardly have supported adequate means for retirement security during these periods. Further, the results would have been especially devastating for those regularly withdrawing funds from investment accounts to pay ongoing bills.

Fast forward to the new millennium.

Below is a chart compiled by 2013 Nobel prize winning economist Robert Shiller of Yale University from his bestselling book, Irrational Exuberance. The chart reflects “real” inflation adjusted rates of return from stocks, including dividends, going back to 1870.

Robert Shiller S&P 500 S&P Composite Stock Price Chart

(For an updated chart visit: http://www.econ.yale.edu/~shiller/data.htm)

In 2000, stocks experienced another major bubble. Then, they did it again in 2008/2009.

  • Given the decades-long malaise that historically tends to follow such occurrences, what do you think the outlook will be for the next several decades of stock investing?
  • What impact will potentially anemic markets have on the millions of Americans now staking their future retirement security on equity-driven 401(k) plans?
  • By 2030, nearly one in five Americans will be 65 or older. Will future retirees be able to reliably fund basic living expenses utilizing such resources as a backstop?
  • Were the equity markets ever intended to become the primary means of financial security for such a large segment of the population?

Let me know your thoughts by email or in the comments below.

This article is one in a series of articles I am writing to help promote thought and discussion about how individuals can achieve greater peace of mind and security in retirement. Learn more and get Free access to future articles at this link.